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Persistent strength in the price of oil has once again unleashed
maximum nonsense about the influence of
speculators. Yes, it’s painful that oil never returned to earth
after its 2004 repricing. But, in the search for an explanation,
substituting the arcane for the obvious will not help:
speculators did not create 5-6 years of flat to falling global
oil production. Furthermore, as oil made its way from below
$25.00 to its new level at $100.00, more of the world’s cheap oil
from old reservoirs was swapped out for the new. Given that this
new oil is much harder to extract, the world economy is lucky
that oil remains so cheap. $100 is a bargain.

In the United States where the economy has barely recovered (if
at all) from the 2008 financial crisis, oil consumption remains
weak. With punk demand at home, however, we are instead using our
newly spare refining capacity to turn oil into oil products,
which we then export. In just 2-3 years the US has doubled its
export of gasoline, distillate, and diesel especially. Here is a
chart through the latest reporting week in May, denoted in
million barrels.

Global demand for diesel—the go-to oil product and the hands down
favorite of the developing world—continues to pull the complex
forward. To gauge this demand on a daily basis I have long
suggested following the price of Gasoil. This distillate
benchmark reveals the pulse of demand more accurately than West
Texas Intermediate crude oil, as its a gateway to both industrial
use of oil and also to diesel. When China experiences drought and
reduced hydropower, and is already up against maximum coal
capacity, it reaches for distillate. We have seen this as well in
post-Sendai Japan: reduced power generation from their nuclear
grid has sent Japan scrambling for coal, LNG, and more
distillate. This is one of the reasons why oil inventories in
Asia (and also Europe) are dropping hard this year.

In th

e two graphs to the right, we see Total Oil Inventories in OECD
Europe and Asia have fallen below five year averages. It’s not a
mistake that Gasoil has been trading in a band around $1000 a
tonne, or that Brent crude oil remains stubborn at $110.00 per
barrel. The loss of Libyan oil combined with the demand shocks
out of Asia–Japan’s post earthquake and China’s drought and
automobile adoption–are the obvious explanations for oil’s
current price.

The effective of speculative price amplification only takes place
in timeframes that have little to no effect on consumers. Hardly
anyone paid $148.00 for oil in the summer of 2008. Just as hardly
anyone paid $34.00 for oil in early winter of 2009. Societal
fears about the effects of speculators on price have been alive
since the time of Cicero (see: A Famine at Rhodes). The average price of oil
in 2008 was $99.67. The average last year was $79.48. And this
year the average so far is $85.00. Those are the prices we pay.
So, face up.

It is depressing that the US government, and the Obama
administration which has done nothing to downshift our dependency
on the Auto-Highway complex, has also joined the speculation
over speculation. Consumption growth rates among the 5
billion people in the developing world have been soaring for a
decade. Global costs to extract new oil have doubled, and
tripled. Watching the President serve up the tired narrative that
speculators have driven the price of oil should dissuade
optimists from thinking the US public is ready to face up to
reality.